The UK management consulting sector is facing an unprecedented financial squeeze, according to data from the MCA’s latest annual report on the sector. Salaries now account for a record % of firms’ total costs – and yet salary levels appear too low to prevent an exodus of consulting staff to roles in industry or the City. Meanwhile operating margins have fallen to only 9%, leaving firms with little room to manoeuvre on the salary front. Taken in combination, the data points to a major resourcing crunch in the coming year. The implications are likely to be that clients must either accept a rise in consulting fee rates this coming year or accept that projects will be delivered with a lower calibre of staff or with a greater proportion of work undertaken in low-cost offshore offices.
UK consulting industry facing a resourcing crunch
On first reading, the results presented in the MCA’s annual report (“The UK consulting industry”
) make for encouraging reading. Management consulting revenues* are shown to be up 16% year on year, with “Top 10” firms having grown at 13% over the last year. Firms not in the top 10 grew 36% year on year, highlighting the particular vibrancy of the smaller niche firms within the UK consulting industry.
Private sector demand was the driving force behind this strong growth of the industry, with private sector revenues up 22% year-on-year. Public sector spend on consultants, by contrast, grew a more modest 5% - after a number of years in which it provided the main momentum for growth in the industry. Practice areas enjoying the most substantial growth were financial services, telecoms, transportation and energy.
Consultancies facing a financial predicament
However, this positive news on the revenue front masks a deeper problem within the industry – an inability to compete for the most talented staff. By way of background, the number of fee-earning consultants employed within the sector has grown significantly year on year. Permanent fee-earning consulting staff grew by 17 percent during the year, while the contractor pools used by consultancies grew 20 percent. This reinforces Top-Consultant’s view that the last year has been a very buoyant one for recruitment activity within consulting. However, headcount has grown faster than revenues and this has been to counter the fact that downwards pressure on fee rates has persisted over the last year.
As the MCA data below indicates, only IT consulting has seen an increase in the revenues generated per consultant this last year; management consulting has seen revenues per consultant fall – at a time when the salaries of consultants have been rising.
% annual changes in revenue generated per consultant employed
Herein lies the nub of the problem. All firms are reporting significant difficulties in hiring sufficient numbers of qualified, experienced staff. Yet salaries rose only 4.5% this last year (source: 2007 salary benchmarking report
) and with firms’ operating margins having collapsed to 9% there is little scope to raise remuneration levels significantly. Operating margins have fallen to 9 percent, down from 18 percent in 2003. So despite a resurgence in demand for consulting services, a combination of fee rate pressures and salary inflation have severely reduced profitability levels within the industry – and something now has to give.
With consulting employers losing out on staff to competitors from the FTSE 100 index and the City, it is clear that consulting salaries have been constrained as much as is feasible without severely harming the sector’s ability to deliver. Yet with the major consulting firms now publicly owned, a further erosion of margins to enable a rise in remuneration levels is also unthinkable. As the chart below indicates, salaries are now such a significant proportion of total costs that savings in other areas cannot free up enough budget to fund any significant rise in salaries. Two-thirds of all costs are now staff costs and so the only means of paying staff more will be to have them billed out for more in the coming years.
Average cost structure of MCA member firms, 2001-2006
Indeed fee rate rises are seen as inevitable by many in the industry and the MCA report suggests some upwards movement on fee rates is now beginning to be seen: “After several years in which fee rates have been falling or stationary, there are signs that some rates are starting to improve, at least in some areas.” This fee rate trend will need to continue - and accelerate - if consulting is to continue to provide clients with some of the brightest minds in our economy, for the report concludes that the “war for talent” remains consulting firms’ biggest challenge and a shortage of good staff its greatest constraint.
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* The MCA’s definition of management consulting revenues is comparable to what we would define as “pure consultancy”, namely the total fees of MCA member firms less income derived from outsourcing/managed services and IT systems development.